Company law Case: Tara Prasad Lamichhane vs. Tara Prasad Poudel, NKP 2080 B.S, Vol.1, Pages 168
Case: Doctrine of Ultra Vires
Plaintiff: Tara Prasad Lamichhane.
Defendant: Tara Prasad Poudel.
Decision No: 11022
This case is related to whether a bank guarantee could be restrained or released under Section 87(2) of the Contract Act, 2056 after completion of the main contract, and whether an unauthorized act of a company director could bind the company.
Facts of the Case:
Khampache P.S.J.V. obtained a contract for construction of a truss bridge at Hilsa, Humla. For supplying materials and constructing the bridge, it entered into a contract with Jalap Nepal Pvt. Ltd. on 2071/01/26 BS. A Rs. 25 lakh bank guarantee was issued by NCC Bank in favour of Jalap Nepal. The appellant claimed that after completion of the work, it calculated the remaining amount with Jalap Nepal’s director Amrit Shrestha and paid Rs. 19,95,864.81/- by cheque on 2073/05/28 BS. Amrit Shrestha also prepared a document stating that the bank guarantee would be released. However, Jalap Nepal later claimed that money was still payable and sought payment under the bank guarantee. The appellant therefore approached the Kathmandu District Court under Section 87 of the Contract Act, 2056, seeking an order preventing payment under the bank guarantee and its release. Jalap Nepal argued that the final account had actually been calculated with its Managing Director Taraprasad Paudel, showing Rs. 3,53,95,353/- payable, and that Amrit Shrestha did not have authority to finally settle the account or release the bank guarantee.
Plaintiff’s Claim:
Plaintiff claimed that it had completed its contractual obligations and paid the remaining amount to Jalap Nepal Pvt. Ltd. Since director Amrit Shrestha had received the payment and provided a document undertaking to release the bank guarantee, defendant could not lawfully claim the guarantee amount again. Therefore, plaintiff sought an order under Section 87 of the Contract Act, 2056, restraining payment of the Rs. 25 lakh bank guarantee and directing its release.
Defendant’s Arguments:
Defendants argued that the final accounts had already been settled with Tara Prasad Poudel, the person authorized and specially responsible under the contract, and that an amount of Rs. 3,53,95,353/- was determined as payable. They argued that plaintiff concealed this fact and improperly relied upon a subsequent settlement with Amrit Shrestha. They further argued that Section 87 of the Contract Act could not be used to stop payment under an unconditional bank guarantee and that plaintiff’s claim should therefore be dismissed.
Legal Issues:
- Whether an act performed by a company director without lawful authority could be legally binding upon the company?
- What type of order could be issued under Section 87(2) of the Contract Act, 2056, including whether a remedial order could be issued under that provision?
- Whether Section 87(2) could be used to restrain payment or release a bank guarantee issued under a separate contract from the main contract?
Decision of Courts:
Kathmandu District Court: District Court dismissed the claim on 2074/02/31 BS. It held that an unconditional bank guarantee issued by NCC Bank in favour of Jalap Nepal Pvt. Ltd. constituted an independent contract and that an order under Section 87 could not be issued to restrain its payment or direct its release.
Patan High Court: The High Court, upheld the decision of the Kathmandu District Court on 2074/07/28 BS. It held that both parties agreed that the contractual work had already been completed, and the dispute concerned mutual accounts and payments. Therefore, Section 87 could not be used to restrain payment under the unconditional bank guarantee.
Supreme Court: The Supreme Court dismissed plaintiff’s appeal and upheld the High Court, Patan’s decision. The Court held that Amrit Shrestha had not been shown to have the legal authority to finally settle the accounts on behalf of Jalap Nepal Pvt. Ltd. in the circumstances of the case. An unauthorized act of a company director cannot automatically bind the company, particularly where the act is not in the company’s interest. Section 87 of the Contract Act is a protective and preventive remedy intended to prevent conduct that may make performance of an existing contract impossible; it is not a remedy for resolving disputes after the relevant contractual work has been completed.
Established Principles:
- An unauthorized director cannot automatically bind a company, and after the main contract was completed, Section 87 could not be used to stop payment under an independent bank guarantee.
- Fiduciary Duty and Due Diligence: Company directors and officers must exercise their authority for the proper purpose, act in the company’s interest, and exercise reasonable care and diligence.
- Independence of Bank Guarantees: A bank guarantee is a separate and independent contract from the main contract. Therefore, disputes between the parties to the main contract do not ordinarily justify judicial restraint on payment under the bank guarantee.
